Cost Drivers Analysis

Cost Drivers

It is any activity that causes a cost to be incurred In traditional costing the cost driver to allocate indirect cost to cost objects was volume of output. With the change in business structures, technology and thereby cost structures it was found that the volume of output was not the only cost driver. Some examples of indirect costs and their possible drivers are: Maintenance costs - number of machine hours; raw material costs – number of cost orders received; inspection costs- number of inspections or the hours of inspection or production runs. The cost driver for short term indirect variable costs may be the volume or output or activity but the long term indirect variable costs, the cost drivers will not be related to volume

Without customer demand for products or services, the organisation cannot exist. To serve customers, managers and employees make a variety of decisions and perform many actions/activities. These decisions and activities, undertaken to satisfy customer demand, drive costs. Morse, Davis and Hartgraves suggest that cost drivers should be divided into three categories:, the following may be types of cost drivers: 16.12.3.a. Structural Cost Drivers

These are fundamental choices about the size and scope of opera¬tions and technologies employed in delivering products or services to customers. Decisions affecting structural cost drivers are made infrequently and once made, the organisation is com¬mitted to a course of action that will be difficult to change. For a chain of super market stores

a) Determining the size of stores. This will affect the types of merchandise that can be provided to customers and operating costs.

b) Determining the type of construction' A small size store will involve less cost. But it may not be suitable to store many other needed items.

c) Determining the location of the store. Location in a high class shopping complex will cost more but will attract more

-Organizational Cost Drivers

These are choices concerning the organization of activities and involvement of persons inside and outside the organization in decision making. Like structural cost drivers, organizational cost drivers influence costs by affecting the type of activities and costs of activities performed to satisfy customer needs. Decisions that affect organizational cost drivers are made within the context of previous decisions affecting structural cost drivers. In a manufacturing organisation, previous decisions about plant, equipment and location are taken as given when decisions impacting organisational cost drivers are made. In a manufactur¬ing company, examples of organisational cost drivers are:

 Preferring a limited number of suppliers. This may be useful in ensuring proper supplies in proper quantities at proper time

 Authorising employees to make decisions and giving them cost and other data.This will make employees customer-oriented, reduce costs and improve decision speed. Production Workers, for example, may take steps to reduce manufacturing costs and defects and spoilage

 Deciding components of a product to fit them in the most correct